Week in Review

Short-term thinking risks long-term crisis

Grant Robertson has indexed benefit rates to wages, but without a long-term plan for real stimulus and revenue gathering, he risks creating a crisis like superannuation. 

ANALYSIS: It won’t have escaped anyone’s attention that there were some big spends in Thursday's budget. That was the idea after all — shock and awe. Some of the biggest spends were obvious: mental health gets $1.9 billion, schools have $1.2 billion set aside for new buildings, and hospital assets get $1.7billion.

Then there were the small but significant spends. The most significant of these was the indexation of benefits to wage growth instead of the rate of inflation. Before the infamous 1991 'Mother of All Budgets' the benefit system was underwritten by the principle of relativity, meaning benefit rates kept up with the cost of living. That all changed in 1991, precipitating a steady increase in poverty rates. 

The immediate cost to the Government is small, just $320.2 million over four years. It opens the door to large increases in future. Superannuation payments, which are also pegged to wages, rose from $11.6 billion in 2014 to $14.6 billion this year, placing enormous pressure on the Government’s finances. 

Now, a large part of that is due to the fact that an increasing number of people collecting Superannuation is also going up, meaning more people are collecting larger payments.

Brad Olsen, an economist from Infometrics points out, Budget forecasts project the same is likely to happen to beneficiaries, with more people collecting benefits than previously thought.

In fact, Treasury anticipates 15,000 more people to be collecting Jobseeker support in 2023 than back in December, on the back of weaker growth. Welfare payments are now expected to be $1.3 billion higher over the next four years than previously expected. 

Treasury’s forecasts over the next four years suggest it has enough money to pay for the extra cost, but that doesn’t mean it always will. Long-term forecasts from the Tax Working Group showed a looming budget deficit of roughly 1.2 percent of GDP by 2030 and a massive 4 percent of GDP by 2045 as superannuation and health costs become too great to be funded by existing revenue. Add to this an unfunded increase to benefit rates, and you have a problem. 

It’s not a total catastrophe. New Zealand’s tax system is extraordinarily effective at recouping money. Get benefits rates right and people spend more, pay more GST, and stimulate the wider economy. But rising costs throughout the social welfare system, including both super and benefit rates, will need more money and with the Government firmly set against Capital Gains Tax and income tax rises, it’s given no indication of where that money is going to come from. 

If the answer to an economic problem is that it’s okay for people to be living in poverty, you’re probably asking the wrong question.

At the moment, rising costs are being funded from increased revenue generated by the growing economy. That’s good news. While the rate of growth is slowing, it’s still far ahead of comparable developed economies. 

Treasury expects that growth to continue — but, and here’s the rub, others aren’t so sure. Kiwibank’s chief economist fears Treasury might be overstating the influence of fiscal policy like stimulus in its forecasts. 

We’re at the top of the economic cycle now. This is when things typically start to come unstuck. Robertson is rightly loosening the purse strings, announcing an impressive  $1.7 billion in additional capital spending. It will now spend $14.8 billion on capital projects over the next four years. 

This is designed to stimulate the economy. But an unexpected problem the Government has run into this year is that it hasn’t been able to spend as much money as it previously thought. The Government’s eight-month operating surplus was bigger than expected when announced this March, in part because it spent $879 million less than it anticipated on the purchase physical assets. 

One of the questions doing the rounds at the moment is whether the Government will actually be able to spend all the money it’s promised to. Projects like KiwiBuild were meant to inject billions into the economy, but have fallen far short of expectations. Even the Provincial Growth Fund is struggling. While it’s allocated $1.7 billion in spending, much of that money has yet to be paid out.

This could be quite serious when the economy is depending on the stimulus of these projects. 

Economist Cameron Bagrie said Treasury’s forecasts were “predicated on Treasury itself getting money out the door”.

He was concerned that the Government didn’t have a pipeline of quality spending ready to go. While the intention to spend was there, business cases, consultation and capacity constraints meant actually breaking ground on projects took time.

With low rates of debt, spending wasn’t the problem, it’s having quality projects ready to jump of the rank that’s important. At ANZ’s post-budget breakfast in Wellington, chief economist Sharon Zollner made the same point — capital investment is good, but it has to be on quality projects. This looks like it’s improving, with capital spend on hospitals and schools being slightly more concrete than ephemeral PGF business cases. 

But the fact remains that Treasury remains far more optimistic about growth forecasts than most private and institutional economists, largely because it expects that money to be spent. 

The stimulus from capital spending is a short-term solution. Indexing benefit rates makes sense. In the last 30 years, the private sector and welfare system has been unable to supply a decent standard of living to New Zealand’s poorest. If the answer to an economic problem is that it’s okay for people to be living in poverty, you’re probably asking the wrong question.

The right question is how to afford it: How to nurture an economy that creates good jobs for everyone, and how to pay for a system that supports people decently, whilst encouraging those who can work to find it. 

This budget only goes part way to solving that question. With its world-leading Wellbeing Indicators, legislation like the Zero Carbon Bill, and research like the Welfare Expert Advisory Group, the Mental Health Report, and the Tax Working Group, this Government has proved adept at identifying problems and narrowing them down to policy suggestions.

But marrying that policy to political and economic reality has so far proved difficult. Worse still, in many cases, the solution has been kicked out for future generations to deal with.

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